Will Partnership Distributions of Appreciated Property Become Taxable

• June 10, 2021
• Paul Neiffer

One of the provisions buried in President Biden’s green proposal from a couple of weeks ago seems to indicate that a distribution of appreciated property from a partnership will now become a taxable event.  There is very little detail on this provision, but farm ownership planning would change dramatically if this happened.

Under current laws, a distribution of appreciated property out of a partnership rarely results in any taxable gain.  If this provision passed, this would now change.  There is both a positive and negative to this provision.  The negative is for the person(s) being allocated the gain since they would owe tax on the distribution.

The positive is for the person(s) receiving the property since they will get a step-up in basis.  Current law does not allow a step-up in basis and the tax will be owed when it is sold.  This new provision accelerates that gain.  

This is not an extra tax but rather an acceleration of the tax.  Current law would allow a tax-free step-up once the person owning the partnership asset passes away.  This may also get eliminated.

Very little detail has been provided on this provision and it is likely not to pass as is, but it is important to understand that this is being considered.

Another provision would subject any asset that has appreciated and never been taxed for 90 years to be subject to capital gains tax at that time.  

We will keep you posted.

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